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Monday, January 20, 2014

Should a defendant in a consumer fraud class action be able to defeat certification through evidence that its customers say they are "satisfied," even when the the allegation is that the product is snake oil? Or would that transform the placebo effect into a defense to fraud? That's the question the Ninth Circuit will be asked to answer in Cabral v. Supple, an appeal in which I just filed the opening brief for the plaintiffs.

About 50 million Americans, many of them elderly, suffer from arthritis and joint disease. Joint pain can be very painful, and it has no known cure. Enter dietary supplement manufacturers, who claim that their largely unregulated products can succeed where standard medicine fails. Supple is one such company. Supple tells consumers—through websites, television infomercials, and telemarketing—that spending $114.90 per shipment of the company’s special fruit juice will “completely reverse[] and halt[] the disease process” for joint disease, including arthritis.

Supple is facing a consumer class in California alleging that its claims are false and that the supplement has no real efficacy. A district court certified the class and Supple appealed to the Ninth Circuit, which agreed to hear its interlocutory appeal. The company's main argument is that the district court was wrong to ignore evidence that Supple's customers are "satisfied." That evidence takes two forms: customer testimonials and evidence that customers made repeat purchases by failing to cancel automatic subscriptions.

Our brief points out that this evidence, even if admissible, wouldn’t prove that Supple’s customers experienced anything beyond the placebo effect. In fact, testimonials may actually demonstrate that a fraud is succeeding -- that consumers are fooled by false advertising. And consumers' failure to cancel their automatically renewing subscriptions is just evidence of what behaviorial economists call "status quo bias" (or what we might call laziness or inertia). As Richard Thaler and Cass Sunstein point out in their book, Nudge, "[i]f renewal is automatic, many people will subscribe, for a long time, to magazines they don’t read.” They go on:

Those who are in charge of circulation know that when renewal is automatic, and when people have to make a phone call to cancel, the likelihood of renewal is much higher than it is when people have to indicate that they actually want to continue to receive the [product.]

That's why default choices are so powerful. Evidence of non-cancellation tells us nothing about whether a product works, especially when that product is what economists call a "credence good" -- a product (like a dietary supplement or pill) whose qualities are difficult or impossible for consumers to properly evaluate on their own. In any event, a product’s efficacy is a question for the merits, not class certification. On the merits, the veracity of the company's claims will be determined on the basis of common proof -- scientific evidence of its efficacy, or lack thereof. Because the veracity of the company's advertising is an objective question, answered from the perspective of a reasonable consumer rather than subjective testimonials, class treatment is particularly appropriate. It will be interesting to see what the Ninth Circuit says.